Microsoft and Barnes & Noble team up to boost Nook e-reader

Huge $605 million investment will help Nook compete against Amazon Kindle and Apple iPad

LAST UPDATED AT 09:01 ON Tue 1 May 2012

MICROSOFT'S announcement yesterday that it is to invest $605 million in Barnes & Noble will help the bookseller's Nook e-reader compete against Amazon's Kindle and Apple's iPad in the battle for ebook sales. A new subsidiary, provisionally named Newco, will be created to handle the new business.

The Los Angles Times reports that the cash infusion will ease pressure on Barnes & Noble to turn a swift profit on the Nook, which controlled 13.4 per cent of the global market for e-readers last year, second to the Kindle. Response to the announcement from Wall Street was immediate and positive, with shares in Barnes & Noble closing at $20.75, up 52 per cent. Microsoft's stock rose three cents to $32.01.

The Wall Street Journal reports that while the deal is important it also smacks of Microsoft playing catch-up, just as it did in deals with Nokia for smartphones and Bing for internet search. Both Nokia and Microsoft's online services business lost money last year.

The deal underscores the importance of the rapidly growing ebook business as consumers increasingly turn to downloading their reading material. Over 35 million e-readers were sold worldwide in 2011.

Many publishing executives fear that Amazon is about to escalate the ebook price wars again. A settlement with several publishers announced by the US Justice Department in mid-April has threatened to upend the ebook pricing system by giving Amazon the potential to expand its reach by artificially lowering prices.

There had been concern from investors that Barnes & Noble didn't have the capital to support an e-reader business to rival that of Amazon even though Nook is the company's fastest growing business, with a 64 per cent year-on-year sales surge in its last reported quarter.

That concern has now gone. William Lynch, chief executive of Barnes & Noble, said the collaboration would enable the New York company to "significantly expand" its digital business and reach hundreds of millions of users through the Windows platform.

For Microsoft, the partnership means access to Barnes & Noble's vast collection of digital content - assets it will need as it tries to become a bigger player in the tablet market. Barnes & Noble can expect to see its Nook reading software installed on millions of new computing devices when Windows 8 is released later this year.

Having a favourable position on the default pages of new Windows computers will give Nook a huge boost, say analysts. "It gives them a much larger partner with deeper pockets, it gives them increased reach," said Peter Wahlstrom at analysts Morningstar. "In the last two years they've had their backs against the wall."

"The deal brings Microsoft technology and engineers into the Nook business - that talent will be tapped to make the Nook even better," said Albert Greco, a book industry expert at the business school of Fordham University in New York. "It gives Microsoft a tablet, and Barnes & Noble global reach for the Nook platform, through Windows 8."